Nuances with AOV, LTV and Conversion Rates With Facebook Ads
I've been managing Facebook ads for 7+ years now and for the longest time I was trying to figure out why I had some campaigns that would bring in insane ROAS and others wouldn't. I knew I was a great Facebook ads manager, but why did I have some campaigns that didn't bring in amazing results? Why didn't ALL the campaigns I worked on bring in high ROAS? What exactly was the difference between these campaigns that got great results and ones that didn't?
After a bunch of digging and working with dozens of businesses, I discovered that the businesses with high ROAS ad campaigns had their website foundation fully dialed in. They were essentially holding up their end (which is what they're responsible for) which allowed them to reach high ROAS with their campaigns.
But the businesses that had low ROAS? I was always trying to figure out what was going wrong; it finally became clear to me that all of those businesses had one thing in common- they DIDN'T have their website foundation dialed in. So it wasn't actually my fault -- those businesses weren't holding up their end and I was incorrectly taking ALL the blame.
What I’ve learned is that the website foundation needs to have the following metrics in order to be ready to find huge success with FB ads
Conversion rate - you want this number to be at least 1%, if not well above 2%
Average order value - you want this number to be at least $50
Lifetime value of a customer - you want this number to be as high as possible, but really no less than $100
Keep in mind that these numbers can fluctuate among businesses and those numbers I just shared are really just an average baseline. While it can be challenging to wrap your head around how these numbers will affect your ads, I’m going to do my best to explain how they do in this video.
For starters, if you have low cost products, such as something that is only $15, then you really should have a much higher conversion rate than just 2%. In simple terms, that’s because a $15 purchase is an easy purchase to make and also because it can be very challenging to make Facebook ads profitable with a low cost product -- there are things like ad space competition that can drive the ad costs up a bit and you’ll need that higher conversion rate to help even things out. This might also mean that your AOV is under $50 and that’s OK with Facebook ads as long as your LTV is high. This is because it’s not realistic to expect that all low cost products will be profitable with first time customers through FB ads. You essentially need really a high conversion rate for this to be possible.
What this means, is that the AOV doesn't necessarily need to be $50, as long as the LTV is higher and the conversion rate is higher. And on the flipside, the LTV doesn't necessarily need to be super high, as long as the conversion rate is higher and even the AOV is higher. So these thresholds or baseline metrics are just a baseline -- some business' metrics will need to look a little different. Finding the "right" formula for your business to work, particularly with FB ads, is a delicate balance when it comes to your foundation. If one area in your business’ site's foundation is too low, then you must adjust accordingly by making sure your other metrics are better.
Let me help clarify further by giving you a few specific examples:
- A business that sells a $30 one-time product will only have a $30 lifetime value of a customer, which is not high. That means their website conversion rate needs to be pretty high, like above 4% consistently for it to be profitable with Facebook ads. It might even need to be 5%. We don’t normally work with businesses that have products in this price range that aren’t necessarily repeat buys...mainly because it’s tough for the ROAS to be high. It’s only possible if the ads are always performing extraordinarily well (like unrealistically well) and if the website conversion rate is high at all times. Both of those things are quite challenging. Doesn’t mean it’s impossible, but I’m not going to beat around the bush: it’s hard.
- Here’s another example. We’ve seen businesses that sell $40-$50 products and the conversion rate is just above 1% and that makes it very challenging with Facebook ads. A business that sells a $45 product and has a slightly higher conversion rate of 2.3% will need to have a high LTV for this to be profitable. If the LTV isn’t high, it can definitely be a challenge with Facebook ads. Why? Because a higher LTV gives you more wiggle room on the front end. New customers are always more expensive to convert and past customers are cheaper to convert because they already know you and like your product. If you have a high LTV, then you most likely can handle a lower ROAS for purchases by new customers and it won’t necessarily dig into profits...in fact, it should make you more money in the long run.
- Here’s another example. A business that sells a $150 product with about a $150 AOV and has a 2.5% conversion rate is doing very well with their process of converting people on their site. We’ve seen this and it’s entirely possible. With those 2 numbers alone, you don’t really need to worry about LTV all that much, but again, it always helps to have a high LTV since it essentially allows you more flexibility on the front end with new customers. In this scenario, you could offer an outrageous first-time customer discount, like 30% or more, which could attract tons of new customers, and then you’ll make up for it multiple times over once those new customers turn into repeat customers. This is sort of the dream scenario.
These metrics are different for every business, so it’s really just important to understand that there is nuance to all of this. If one area is lacking, another area must make up for it. And in some cases, that’s unrealistic for your business or, with Facebook ads, it can be unrealistic to expect certain outrageous metrics from Facebook IF some or all of your metrics are lacking.
Here’s a quick RECAP and simple way to think of things:
- If your LTV is low, your conversion rate must be high.
- If your AOV is low, then your conversion rate and LTV should be high.
- If your conversion rate is low, your LTV should be high.
- Aim for the highest website foundation metrics possible. This will make it MUCH easier to run amazing FB ads that will allow you to grow your business substantially. Remember, Facebook ads won’t fix your business if your website foundation is broken.
If you want to know if your site metrics are aligned well for Facebook ads, fill out our form and we’ll let you know.